Spanish Banks 2019 Outlook: On A Firmer Footing - March 8, 2019 ANALYTICAL CONTACTS - S&P Global Ratings
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ANALYTICAL CONTACTS
Elena Iparraguirre
Lucía González de Heredia
RESEARCH CONTRIBUTOR
Marta Heras
Spanish Banks 2019 Outlook:
On A Firmer Footing
March 8, 2019What To Watch For In 2019
— Outlooks on Spanish banks are now largely stable, after a few years of upgrades
across the system. Future rating actions will likely be driven by bank-specific
developments rather than system-wide developments.
— The political landscape looks more uncertain than the economic landscape.
Spaniards face four imminent elections, including general elections on April 28. In
May there's municipal, regional, and European elections. The emergence of new
political parties challenging mainstream parties suggests fragmentation, which could
delay the negotiation of a coalition government.
— Despite decelerating, the economy should post solid growth in 2019 (+2.3%) and
unemployment should continue declining (14.1%). Confidence indicators remain solid.
— Banks’ bottom-line profitability in 2019 will not change much, with the domestic
business RoE standing at around 6.4%.
— Net interest income could finally starting growing again this year and operating
costs could on aggregate remain flat, although we could see discrepancies in
players' cost performance. Downsizing of branch networks and staff will continue.
— Credit costs, however, will increase from abnormally low levels in 2018, and,
litigation costs could resurface. Watch out for the EU Court of Justice's decision
on the use of the IRPH index (Indice de Referencia de Préstamos Hipotecarios) for
mortgages (expected by mid-year) and the outcome of BBVA’s ongoing
investigations into wiretapping allegations.
— Banks’ capital should keep strengthening, primarily through internal capital
generation. Only a few banks (Abanca and Bankinter) can still tap the AT1 market.
Most others have already filled their regulatory buckets. Ibercaja could raise fresh
equity if it gets listed. For several players the dividend pay-out will approach 50%.
www.spglobal.com/ratingsdirect March 8, 2019 2What To Watch For In 2019
— After large banks' sizeable divestments of legacy assets in 2017 and 2018, NPA
reduction will slow in 2019. We forecast NPAs to decline to 5.5% by end-2019. If
mid-size banks do not follow, differences in asset quality indicators could widen.
— Credit growth should finally turned positive in 2019, but stay modest. Expansion
into consumer lending is something to watch, although it still represents a limited
share of total credit.
— M&A will remain a hot topic. Liberbank and Unicaja are expected to announce
merger terms in the second quarter, which could see others follow. We see a case for
consolidation among mid-size players. Abanca clearly aims to grow through
acquisitions, as confirmed recently by showing interest in acquiring Liberbank.
— Banks will continue accumulating liquidity and will raise additional market
financing to prepare for the TLTRO repayment, a large part of which is due mid-
2020. The new TLTRO III announced yesterday by the ECB will provide banks funding
flexibility, but whether they will participate will depend on to what extent it is
economically attractive.
— Some banks could launch inaugural issues of senior nonpreferred (SNP) debt this
year. So far, only Santander, BBVA, and Caixabank have tapped the market and
yields are rising. By mid-year we expect all banks to get confirmation of their MREL
requirements. However, if only a portion of this needs to be subordinated, banks may
end up issuing lower volumes of SNP than we previously expected, which could limit
the possibility of ALAC uplift for ratings.
— Banks will make progress in digital transformation, but this is a multi-year journey.
www.spglobal.com/ratingsdirect March 8, 2019 3After years of upgrades stability lies ahead, with rating actions
triggered by bank-specific, rather than systemic, events
A+ S Current Rating
A S N
Lowest Rating
A- S S
BBB+ P P S S Outlook*
BBB P
Spain LT sovereign
BBB- P S rating§
BB+ Spain lowest LT
rating
BB
BB-
B+
B
B-
CCC+
*S--Stable. N--Negative. P--Postiive. §As of March 2019. Current ratings and outlooks as of March 4, 2019. The lowest ratings occurred mostly at
end-2012. We first rated Laboral in June 2016, and Abanca in March 2013. Source: S&P Global Ratings.
www.spglobal.com/ratingsdirect March 8, 2019 4Spanish Banks Are Largely Rated In The ‘BBB’ Category,
With Only Two In Speculative Grade
Distribution Of Long-Term Issuer Credit Ratings On Spanish Banks
5
4
3
2
1
0
A A- BBB+ BBB BBB- BB+
Data as of March 2019. Source: S&P Global Ratings.
www.spglobal.com/ratingsdirect March 8, 2019 5Solid Growth Should Support Positive Labor And Real
Estate Dynamics
S&P Global Ratings' Forecast Of Main Evolution Of Transactions And Prices
Economic Variables For Spain In The Real Estate Market
2016 2017 2018f 2019f 2020f 2021f Total Housing Transactions (Left Axis)
Average Price New Housing (Right Axis)
Real GDP % 3.2 3.0 2.6 2.3 2.1 1.8
1.2 2,200
Real Exports % 5.2 5.2 1.9 3.3 3.8 3.7
Real Imports % 2.9 5.6 3.8 3.8 3.6 3.4
1.0 2,000
Real Fixed Investment % 2.9 4.8 6.1 3.7 2.5 2.3
12 months cumulative (mil.)
Real Private Consumption
2.9 2.5 2.4 1.8 1.6 1.5 0.8 1,800
%
Real Government
1.0 1.9 2.1 1.9 1.6 1.4
Consumption %
€/m2
0.6 1,600
CPI Inflation % -0.3 2.0 1.9 1.9 1.7 1.8
Unemployment Rate % 19.65 17.23 15.36 14.06 12.96 11.92
0.4 1,400
Short Term Interest Rate % 0.01 0.00 0.00 0.05 0.50 1.00
Long Term Interest Rate % 1.39 1.56 1.44 1.99 2.70 3.25
0.2 1,200
Exchange Rate ($ Per €) 1.11 1.13 1.18 1.17 1.23 1.25
Nominal house prices, %
4.5 7.3 6.6 4.5 3.4 3.0 0.0 1,000
change y/y
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Y/Y--Year on year. CPI--Consumer price index. f--Forecast.
Sources: S&P Global Ratings, Eurostat, Banco de Espana, OECD, Instituto
Nacional de Estadistica (INE). Source: Ministerio de Fomento (Ministry of Public Works and Transport).
www.spglobal.com/ratingsdirect March 8, 2019 6The Political Landscape Remains Uncertain
— Spain will go to early general elections at the end of Distribution Of Representation In Last
April, after Parliament rejected the 2019 budget. Parliament
— Municipal, regional and European elections will take
place in May. PP PSOE
Podemos Ciudadanos
— Polls suggest a fragmented vote, with three relatively Esquerra Republicana PNV
new national parties (Podemos, Ciudadanos, and Vox) Mixto
competing with the two traditional mainstream 1%
parties (PP and PSOE). Government formation will 3%
6%
most likely require alliances, which may take time to
form.
9%
— The risk of confrontation between the central
38%
government and Catalonia's regional government
remains a potential source of instability.
19%
24%
Source: Congreso de los Diputados.
www.spglobal.com/ratingsdirect March 8, 2019 7Revenues Should Finally Grow In 2019, But We Forecast A
Stable Bottom Line
2019f 2018e — Domestic returns in 2018 should exceed our expectations, with
domestic RoE likely reaching 6.4%.
— Systemwide, we think revenues will prove resilient in 2018 (with
+2.4% NII declining only modestly). Improved profits will be driven by cost
NII savings (we could see a 3% fall in operating costs in 2018) and
(abnormally) low credit impairments. The one-off provisions
charged to equity upon the first-time implementation of IFRS 9
and the accounting recognition of the massive divestment of real
Other +1.5% estate assets in the year may be distorting the credit-impairments
income picture.
— For 2019 we forecast domestic banks’ net income and RoE will
stay virtually unchanged.
Operating 0% — We see banks’ NII growing at last, by about 2%-3%, driven by
expeneses volume growth, a change in mix toward more profitable products,
and lower NPAs--but not because of higher interest rates. We also
see competition remaining tough. Unlike previous years, we no
longer think lower funding costs will benefit NII.
+41.7%
LLP — We see noninterest revenues growing by 1.5% and therefore total
revenues rising by 4.0%. Market turbulence could challenge this
forecast as it could undermine fee income generated from asset
management.
Net -0.3%
— Streamlining of branch networks and staff will continue, allowing
income
for overall flat operating costs on aggregate. But cost performance
will differ among players depending primarily on their investment
plans.
0 5 10 15 20 25 30
— Conversely, credit impairments will grow from abnormally low
Bil. €
levels in 2018, to a more sustainable 40 bps of average loans.
e--Estimate. f--Forecast. NII--Net interest income, LLP--Loan loss provisions. — Litigation costs could strain bottom-line profits, but are uncertain.
Source: Bank of Spain.
We have not accounted for them in our forecast.
www.spglobal.com/ratingsdirect March 8, 2019 8Despite Competition, The Evolution Of Banks' Domestic NII
And Costs Point To Better Net Operating Income
NII New Loans to Corporates up to €250 Thousand
New Mortages to Households
Operating New Loans to Corporates above €1 Million
Expenses New Consumer Loans
7.0 10%
9%
6.8
8%
6.6
7%
6.4
6%
Average rates
Bil. €
6.2 5%
4%
6.0
3%
5.8
2%
5.6
1%
5.4 0%
Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Bank of Spain. Source: Bank of Spain.
www.spglobal.com/ratingsdirect March 8, 2019 9Improving Profitability Remains A Challenge For Most,
Particularly Mid-Size, Banks And Penalizes Equity Valuations
With a few exceptions we see fairly stable returns in 2019, with Weak share valuations limit banks’ flexibility to raise equity,
some banks' RoE staying below the cost of capital. and could lead to more-generous dividend distributions and
increased risk appetite.
2018e RoE 2019e RoE BBVA Santander Caixabank Bankinter
Bankia Sabadell Unicaja Liberbank
14% 2.0x
12% 1.8x
1.6x
10%
1.4x 1.43x
8%
P/BV
1.2x
6%
1.0x
4% 0.77x
0.8x
0.75x
0.71x
2% 0.6x 0.62x
0.46x
0.46x
0% 0.4x 0.41x
RoE--Return on equity. Data for BFA Bankia before minorities.
Source: S&P Global Ratings, Bank of Spain. Source: S&P Global Ratings, Bloomberg.
www.spglobal.com/ratingsdirect March 8, 2019 10Legacy NPAs Are Becoming Less Problematic For Some
Banks, But Not All
Thanks to disposals of mostly real estate assets by top banks in 2017 and 2018, the system’s NPA stock will probably have
reduced to 7.2% by end-2018, declining further to 5.5% in 2019. Divergence from this average, however, could arise if mid-
size and small players do not follow suit.
NPL (left scale) RE Assets (left scale) Coverage (right scale) Net NPAs to TAC
12% 70% 80%
60% 70%
10%
60%
50%
8%
50%
40%
6% 40%
30%
30%
4%
20%
20%
2%
10% 10%
0% 0% 0%
*Estimate. Domestic data for all banks, as of Dec. 2018. Pro forma NPA of market disposals. NPA--Nonperforming assets. NPLs--Nonperforming loans. RE--Real
estate. TAC--Total adjusted capital, on a consolidated basis for all banks.
Source: Banks' financials.
www.spglobal.com/ratingsdirect March 8, 2019 11After Eight Years Deleveraging, Credit May Finally Grow In
2019
We forecast only modest growth in the stock of private sector credit (+1%) in 2019. This would be the first year of credit
growth since 2010. Consumer lending will remain the most dynamic and, to a lesser extent, credit to non-real-estate
companies. The stock of residential mortgages will likely continue declining, as the gradual amortization of the pre-crisis
vintages, as new production is not enough to offset the gradual amortization of the pre-crisis vintages. Given that consumer
credit has been primarily granted to existing customers mainly for durable goods purchases, and because it is growing from
a low base, we are currently not overly concerned. However, we will monitor how it evolves.
Evolution Of Banks’ Loans To The Private Sector
40%
Corporates excluding RE &
30% Construction
RE & Construction
20%
Annual growth rate
10% Residential Mortgages
0%
Consumption
-10%
-20% Household Other
-30%
-40%
Source: Bank of Spain.
www.spglobal.com/ratingsdirect March 8, 2019 12Capital Strengthening Should Continue
— While capital has strengthened significantly since the CET 1 Fully loaded AT1 Tier 2
crisis, Spanish banks' measures remain below those in 20%
some other peer banking systems, suggesting that
capital reinforcement will continue in 2019. 18%
— Indeed, some larger banks have increased their 16%
medium-term capital targets by 50-100 bps.
14%
— With a few exceptions, we see Spanish banks'
capitalization as largely ratings neutral. 12%
— Abanca and Bankinter might issue additional hybrids 10%
to fully fill their AT1 and Tier II buckets (Unicaja and
Liberbank [both not rated] also have room), and 8%
Ibercaja might raise fresh equity if it finally gets listed.
The majority of banks, however, will rely primarily on 6%
retained earnings for capital build-up.
4%
— We do not foresee Kutxabank or Caja Laboral issuing
AT1. 2%
— Dividend payouts will approach 50% for several banks. 0%
— Santander’s recent decision not to call an AT1 at the
first call date has set a precedent for others. There are
no relevant calls this year, however.
CET 1, AT1, and Tier 2 as of Dec. 2018. *Abanca pro forma capital ratio
includes the recent Tier 2 issue (January 2019); without this the ratio would be
14.8%.
Source: Banks’ financial statements.
www.spglobal.com/ratingsdirect March 8, 2019 13Regulatory Capital Requirements Are Increasing
2019 SREP Requirements — SREP requirements in 2019 have increased on average
by 80 bp, as the transitional arrangements for the
Pilar I Pilar II CCB SB CB Tier I Tier II capital conservation buffer and the buffer required for
systemically important institutions got to an end.
14%
— Four banks, however, also saw an increase in their
12% Pillar 2 requirements: Sabadell, Bankinter, Abanca and
Ibercaja.
10% — Only for Caja Laboral Pillar 2 requirements will be
lower this year.
8% — Pillar 2 requirements range from the 1.20% of RWAs of
Bankinter and Kutxabank to the 2.50% of Liberbank.
6% — BBVA and Sabadell are required for the first time to
build up a countercyclical buffer, while the one
4%
required for Santander increased compared to 2018.
— Buffer over regulatory CET1 requirements looks
2% generally comfortable, with the median standing at
355 bp.
0% — The cushion is lower for Santander, BBVA, Sabadell
and Ibercaja. Conversely, Caja Laboral and Kutxabank’s
capital exceeds substantially the required amount.
— IFRS 16, TRIM reviews and Basel IV could have an
CCC--capital conservation buffer, SB--Systemic buffer. CB--Countercyclical
buffer. impact on banks’ capital measures in the medium
Source: Banks’ financial reports. term.
www.spglobal.com/ratingsdirect March 8, 2019 14Look Out For M&A Activity This Year
Ranking Of Spanish Banks By — In 2019 we could finally see the merger of two mid-size
banks, Unicaja and Liberbank, both the result of a
Domestic Assets
previous merger wave of former savings banks.
— The merger terms are being negotiated. A final
Santander
announcement is expected in Q2.
Caixabank
— This could open the door for another consolidation
BBVA round in the Spanish banking system.
BFA Bankia — Indeed, recently Abanca also showed interest in
Sabadell
acquiring Liberbank.
Bankinter — We certainly see room for more consolidation,
particularly among mid-size players. It could be an
Kutxabank opportunity for banks to strengthen and diversify
Unicaja Banco
franchises, gain size, and dilute the impact of fixed-
cost bases, while facilitating IT and digitalization
Ibercaja investments and accessing the funding markets more
Abanca
easily.
Cajamar — The government divestment from Bankia is unlikely to
happen this year as originally envisaged.
Liberbank
Laboral
0 100 200 300 400 500
Bil. €
Data as of Dec. 2018. Source: Banks' financial reports.
www.spglobal.com/ratingsdirect March 8, 2019 15The ECB’s Programs Gave Spanish Banks Time To
Rebalance Their Funding Structures
Domestic corporate, household and NPISH loans Net External Debt Net ECB Funding
Domestic corporate, household and NPISH deposits
2,000 600
1,800
500
1,600
1,400
400
1,200
Bil. €
Bil. €
1,000 300
800
200
600
400
100
200
0 0
Source: Bank of Spain. ECB--European Central Bank. Source: Bank of Spain.
www.spglobal.com/ratingsdirect March 8, 2019 16Full Normalization Will Only Be Achieved With The
Repayment Of The TLTRO
Spanish banks owe the ECB €167 billion (gross) under the TLTRO. A large part of this matures in mid-2020. We feel Spanish
banks should generally be ready to repay TLTRO funding, which they used opportunistically due to its attractive cost. They
are accumulating liquidity, could increase repo financing with banks, will issue more debt in the capital markets and could
let their government debt holdings reduce (indeed they are already one-third lower than at their peak). The launch of a third
funding program, announced yesterday by the ECB, grants banks flexibility in managing funding. While full details are not
clear, it seems, however, it could be less attractive cost-wise.
TLTRO II Government Debt Held By Financial
Institutions
30 350
25 300
250
20
200
Bil. €
Bil. €
15
150
10
100
5 50
0 0
Source: Bank of Spain. ECB--European Central Bank. Source: Bank of Spain.
www.spglobal.com/ratingsdirect March 8, 2019 17Most Banks Still Have MREL Cushion Build-Up On The
Agenda
Senior Nonpreferred Debt Issued By — So far only three Spanish Banks have tested the
Spanish Banks market: Santander, BBVA, and Caixabank, with
2017 2018 2019
Santander accounting for 75% of the volume of SNP
issued.
Santander — Lack of clarity about the required MREL buffer—which
so far has only been formally communicated to
BBVA Santander, BBVA, and Sabadell—explains limited
issuance up to now.
Caixabank
— Issuance, however, is becoming gradually more
0 5 10 15 20 expensive.
Bil. €
Source: Banks’ financial reports. — Bankia and Sabadell, for example, could tap the SNP
market for the first time this year.
Evolution Of Spreads On Selected SNP
Issues — On aggregate we estimate that banks' issuance of SNP
BBVA Caixabank Santander this year could be about €8 billion.
Mid asset swap spread
200
— In the medium term, issuance volumes could fall short
150 of our original expectations if subordination
requirements are well below total MREL requirements,
(bps)
100
limiting the possibility of bank ratings benefiting from
50 ALAC uplift.
0
— Banco Santander for example is not planning any
issuance of SNP this year.
Source: S&P Global Ratings, Bloomberg.
www.spglobal.com/ratingsdirect March 8, 2019 18Related Research
— ECB Fresh Stimulus spotlights Rising Risks for European Banks, March 8, 2019
— The Top Trends Shaping European Bank Ratings in 2019, Feb 28, 2019
— S&P Global Ratings Comments on Abanca’s Potential Takeover Bid for Liberbank,
Feb 25, 2019
— Bulletin: Spain: Solid Economy, Fluid Politics, Feb 19. 2019
— Europe’s Housing Markets Ease Off the Accelerator, Feb 19, 2019
— Will Santander’s Decision Not to Call Reset the Market for AT1 Instruments?, Feb 13,
2019
— Banking Industry Country Risk Assessment: Spain, 6 Feb 2019
— Bulletin: Spanish Government Will Shift Duty Costs to Banks, Nov 8, 2018
— Spain’s ‘A-/A-2’ Ratings Affirmed. Outlook Positive, Sep 21, 2018
— Reduced Funding Risks Lead to Upgrades at Several Spanish Banks, April 6, 2018
www.spglobal.com/ratingsdirect March 8, 2019 19Analytical Contacts
Primary Analyst Primary Analyst Research Contributor
Elena Iparraguirre Lucía González de Heredia Marta Heras
Madrid Madrid Madrid
+ 34 91 389 6963 + 34 91 788 7219 + 34 91 389 6967
elena.iparraguirre lucia.gonzalez marta.heras
@spglobal.com @spglobal.com @spglobal.com
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